Mad Money

Cheap or expensive? This is Cramer's stock test

Fan of smart, aggressive buybacks: Cramer
Fan of smart, aggressive buybacks: Cramer

What do you do when you're looking for a stock bargain, and you're not sure where to start? Jim Cramer has a few tricks up his sleeve.

"If a company shows you that it believes its own stock is cheap, then that can be a pretty good indicator that it might be worth buying," said the "Mad Money" host.

One word: buybacks. This really puts a company to the test and makes them put their money where their mouth is. Sometimes just buying a stock because you know the company will be right alongside you gobbling it up is enough of an indicator that it is worth owning.

"A large enough buyback that's well-executed can propel a stock higher year after year, giving you some pretty fantastic long-term returns," he said.

On Wednesday, Cramer spoke with Dow Chemical CEO Andrew Liveris and learned that it will be increasing its buyback plan by $5 billion. When combined with total repurchase authorization, that brings them to roughly 17 percent of Dow's market.

That's huge and definitely a needle mover in Cramer's opinion. It's also, he thinks, a stock worth biting into.

Alex Slobodkin | E+ | Getty Images

Now before investors run out and start buying up every company with a buyback, Cramer thinks it is important to clarify that not all buybacks are created equally. Some of them aren't a snazzy Dow Chemical, and just aren't even worth getting excited about.

So how can you tell what a decent buyback looks like? It is one where management thinks a stock is too cheap and trades below its intrinsic value. Management would then roll out a gigantic buyback to retire a large amount of shares. That is a great sign.

"They are Ouroboros stocks: snakes eating their own tails, except on Wall Street eating your own tail can actually create an immense value if done correctly," added Cramer.

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A few stocks that Cramer thinks have buyback opportunity written all over them: Flextronics, the second largest outsourced manufacturing services play on the globe. Jack in the Box, which not only makes burgers, but also owns the Mexican chain Qdoba. He also see's potential in Macy's, Disney, Kimberly-Clark, Viacom, Dr. Pepper Snapple, and even AutoZone which hit an all-time high Thursday despite little growth.

At the end of the day, the "Mad Money" host wants investors to keep their eyes open for deals. When you see a company that becomes a cannibalistic consumer of shares, then you should jump right in and buy them up, too.

Call Cramer: 1-800-743-CNBC

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